Approaches to International Compensation

Designing and developing a better compensation package for HR professionals for the international assignments requires knowledge of taxation, employment laws, and foreign currency fluctuation by the HR professionals. Moreover, the socio-economic conditions of the country have to be taken into consideration while developing a compensation package. It is easy to develop the compensation package for the parent country national but difficult to manage the host and third country nationals. When a firm develops international compensation policies, it tries to fulfils some broad objectives:

• The compensation policy should be in line with the structure, business needs and overall strategy of the organization.
• The policy should aim at attracting and retaining the best talent.
• It should enhance employee satisfaction.
• It should be clear in terms of understanding of the employees and also convenient to administer.

The employee also has a number of objectives that he wishes to achieve from the compensation policy of the firm:

• He expects proper compensation against his competency and performance level.
• He expects substantial financial gain for his own comfort and for his family also.
• He expects his present and future needs to be taken care of including children’s education, medical protection and housing facilities.
• The policy should be progressive in nature.

Balance Sheet Approach:

The Balance Sheet Approach to international compensation is a system designed to equalize the purchasing power of employees at comparable position levels living abroad and in the home country and to provide incentives to offset qualitative differences between assignment locations. The balance sheet approach is widely used by international organizations to determine the compensation package of the expatriates. The basic objective is the maintenance of living standards of the home country plus financial inducement.

• Goods and Services: Outlays incurred in the home country for food, personal care, clothing, household furnishing, recreation, transportation, and medical care.
• Housing: All major costs associated with housing in the host country.
• Income Taxes: Parent country and host country income tax expenditures.
• Reserve: Contribution to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, etc.

Advantages:

• Equality between assignments and between expatriates of the same nationality.
• Facilitates expatriate re-entry
• Easy to communicate to the employees

Disadvantages:

• It can result in considerable disparities between the expatriates of different nationalities and between expatriates and local nationals.
• It can be quite complex to administer due to changing economic conditions, taxation etc.

Going Rate Approach

This is based on local market rates. It relies on comparisons of surveys of the local nationals, expatriates of same nationality and expatriates of all nationalities’ pay packages. In this approach, the compensation is based on the selected survey comparison. The base pay and benefits may be supplemented by additional payments for low pay countries.

Advantages

• Simplicity
• Equality with local nationals
• Identification with the host country
• Equity amongst different nationalities

Disadvantages

• Potential re-entry problems in the home country.
• Variation between assignments for the same employees.
• The rivalry between expatriates of the same nationality in getting assignments to some countries.

Lump Sum Approach:

This involves giving the expatriate a predetermined salary and letting the individual decide about how to spend it. Finally, there is the regional system, under which the MNC sets a compensation system for all expatriates who are assigned to a particular region. Thus, everyone going to Europe falls under one particular system and those going to South Africa come under a different system.

Citizen’s Approach:

In this approach, an international basket of goods is used for all expatriates, regardless of country of origin. The basket of goods includes food, clothing, housing, and so forth. However, expatriates are not provided salary adjustments that would allow them to purchase exactly the same items in the host country as in the home country. Rather, they receive adjustments that would allow them to purchase a comparable local product of the same nature; e.g., rather than a Mercedes (which they had in the home country), they would buy a local luxury car.

Alternatively called the global salary systems, the international citizen’s approach is appropriate when an MNC has a team of dedicated international managers Europeans, Americans or Asians – who are ready to move to any part of the globe easily and effectively. Global salary systems seek to provide worldwide equity in rewards and allow managers to move between countries with minimal effects on lifestyle.